Buying the most expensive stock markets can be a recipe for disaster for your portfolio. Buying the cheapest markets is a far better idea, as I’ll show you. But what’s the best way to figure out which is which?

Figuring out cheap and expensive

First… whether a stock market is “cheap” or “expensive” depends on its valuation. One common approach to valuation is to look at the price-to-earnings (P/E) ratio. For an individual stock, computing the P/E ratio involves dividing a company’s share price by its earnings per share.

For example, a company whose shares trade at $100 and that earns $5 per share has a P/E ratio of 20. In a sense, that means that you’d be “paid back” for your investment in 20 years.

So if the share price of a stock goes up while its earnings stay the same, the P/E ratio goes up… and if the earnings go up but the share price stays the same, the P/E ratio goes down. A lower P/E ratio means a stock is cheaper.

For an entire stock market, calculating the P/E ratio involves finding the weighted average P/E of all the stocks that make up a stock market index. So a large company’s P/E ratio is going to count for more in the overall market’s valuation than a small company’s P/E ratio because it has a bigger weighting in the index.

There are a lot of ways to value a stock, or a stock market, besides the P/E ratio. You can also compare the share price of a company to its book value (the value of a company’s assets minus the value of its liabilities) per share. This is called the price-to-book value ratio (P/BV).

One of the problems with measures like P/E and P/BV is that they’re just a snapshot. Factors like the economic cycle can affect company, market and earnings in any given year. A big company, with a heavy weighting in the market, might have a bad year, throwing off the whole market’s P/E ratio. The weather could hurt some companies’ earnings, and pull down the earnings of the market as a whole. The commodities cycle can have a large effect on commodity companies…and on it goes. So, the P/E ratio is helpful – but it can be deceptive, too.

A better way than using just the P/E ratio is to adjust earnings for these kinds of cycles. One way to do this is to take the average for ten years of earnings (rather than just one year, like with the P/E ratio), and adjust them for inflation, to calculate the cyclically adjusted P/E ratio (CAPE). This smoothens the cyclicality of a single year P/E. It’s more difficult to calculate, but it’s a more complete valuation measure than the normal P/E ratio.

How cheap beats expensive

Investing in markets that have a low CAPE, on average, results in much better returns than buying stock markets with high CAPEs. Of course, this is the same for stocks… all else being equal (and it rarely is, but anyway), your odds of making money improve when you buy a stock that’s cheap, rather than a stock that’s expensive.

Stock market returns for 2016 illustrate this. The graph below shows the returns in U.S. dollars for the 10 stock markets that were the cheapest on CAPE basis as of the end of 2015.

As the graphs shows below, the cheapest markets posted an average return of 19 percent over the year – ranging from a 69 percent return for Brazil, to a 22 percent decline in Egypt’s stock market. By comparison, the most expensive markets recorded an average return of negative one percent (the U.S. performed the best, up 12 percent, and Denmark, the world’s most expensive market, was the worst, falling 13 percent).

The cheapest markets now

Right now, the world’s cheapest emerging markets on a CAPE basis are Russia, Hong Kong’s H-share market, and the Czech Republic. The cheapest developed markets are Portugal, Singapore and Spain. (We’ve written about Hong Kong’s H-share market, here.)

But just because a market is cheap (low CAPE) doesn’t mean that it won’t stay cheap, or get even cheaper, or perform well. At the end of 2015, for example, Singapore was one of the world’s cheapest markets, but the STI returned a lousy 2 percent in 2016. Similarly, just because a market is expensive (high CAPE), it doesn’t mean it won’t get more expensive, or that shares won’t appreciate. For example, the U.S. market had the fourth-highest CAPE at the end of 2015, but the U.S. market nevertheless posted a very solid return in 2016.

Valuation is just one of many factors that investors consider when buying shares, or a market. But it’s a good place to start.

ETFs for the Russian market are traded under the symbol RSX in New York, 3027 in Hong Kong, and RUS in Singapore. (Note that ETFs don’t necessarily directly replicate the index.) And for an approach to earning market-smashing returns in another cheap market, please click here to learn more about our “Project H” research.

Throughout human history, garlic has been used as a spice and as medicine. It’s a staple in the Asian diet, part of everything from monosodium glutamate (MSG) to desserts. Garlic is believed to aid digestion, protect against viruses – and even ward off vampires.

But today garlic may also serve another purpose – as a warning sign of inflationary pressures building in the Chinese economy.

China is by far the world’s largest garlic producer, harvesting over 25 million tonnes in 2016, to account for about 80 percent of global supply. And the price of garlic has been surging. China’s Commerce Ministry says that garlic bulb prices are up over 80 percent since last year.

The renminbi price of physical garlic started to rally in late 2015. That’s partly due to heavy rains, and then snow, that damaged the crop planted for the 2016 harvest in Shandong province, which is where most of the country’s garlic is grown.

In what has become a familiar pattern in Chinese markets, a jump in price attracted speculative buying, the rising market fed on itself, and prices skyrocketed higher.

However, unlike other commodities targeted by Chinese speculators, there are no garlic futures in China. So to bet on a rise in the price of garlic, an investor has to by actual garlic – that is, the type that people chop up and eat.

Large garlic traders generally set up business in Jinxiang, China’s “garlic capital” in eastern Shandong province. Garlic is easy to grow, harvest, transport and store. Modern cold storage facilities – some bigger than a football field – can keep garlic bulbs fresh for up to two years. This gives investors a long selling window.

There are many stories of traders making millions by going to Jinxiang, buying 5 or 10 warehouses, packing them with garlic from the spring harvest, and then slowly selling as garlic prices rally later in the year.

China’s “great ball of money” on the move

Once again, China’s “great ball of money” has been squeezed out of a bubble market by Chinese authorities, only to inflate other markets, like garlic. How does this work? Faced with a slowing economy, the Chinese central bank has provided easy credit to one sector of the economy after another to help stimulate growth.

For example, in the summer of 2014, margin rates (which are the interest rates brokerage firms charge clients who want to borrow to invest) were reduced to help spur investment in the stock market. This move helped inflate a stock market bubble, as the Shanghai Composite Index gained 125 percent over the next 10 months.

When Chinese authorities decided to deflate the country’s stock market by restricting equities trading, the “ball of money” turned to commodities. Chinese speculators used easy money to buy everything from steel rebar and hot-rolled steel coils to cotton and polyvinyl chloride (also known as PVC). Bubbles in those markets quickly expanded – then popped.

The government then turned to the languishing real estate market. It lowered rates and in effect encouraged speculation, which helped push real-estate prices in China’s “Tier 1” cities (like Beijing and Shanghai) as much as 60 percent higher over the past year.

In a replay of the 2015 stock market boom, in October Beijing tightened credit in the hottest housing markets. And now the bubble money is moving out of tier one real estate into other markets – including obscure commodities like thermal coal, coking coal, Shanghai zinc and garlic.

Garlic – a bellwether of high inflation?

Garlic, though, is a food staple that’s integral to the Chinese diet. Higher prices hurt the spending power of Chinese consumers. And in the past, garlic has been a bellwether of impending China inflation.

In 2007, a spike in garlic prices foreshadowed a jump in China’s CPI (consumer price index, used to measure inflation) from 2 percent to 8 percent over the next year. In mid-2009, rising garlic prices preceded a surge in China’s consumer price index, which peaked in late 2011. Rising prices could put a crimp in Chinese consumers’ buying power – and the government is counting on consumers spending more to drive economic growth.

China’s CPI grew at its fastest pace in six months in October due to rising food prices. The producer price index (PPI) – which measures price changes at the wholesale level – also moved higher, rising 1.2 percent year-on-year last month. This put an end to 54 months of negative PPI growth.

Deflation has been a concern for several months in China. So you might think that the Chinese government would welcome a slight uptick in inflation. The country’s CPI growth target is set at around 3 percent, so October’s 2.1 percent figure is in the range of what the government is aiming for.

However, the worry for Chinese policy makers is that surging prices sparked by speculators in garlic and other commodities might spill over into the general economy. A persistently rising CPI would pose a dilemma for the People’s Bank of China (PBOC), which has been focused on spurring economic growth, and supporting a weakened industrial sector.

Should the recent rise in garlic prices – along with inflation in other vegetable, pork and fuel prices – continue, the PBOC might have to choose between higher rates to dampen inflation, and low rates to support growth.

So don’t be surprised if China cracks down on garlic speculators and other frothy commodity markets. Then the question will be, “Where will China’s ball of money move next?”

(Buying value rather than chasing bubbles is the best way to make money in markets. We’ve found one of the cheapest markets in the world, and some of the best investment opportunities there… click here to learn more.)

Diversification is generally considered one of the basic tenets of investing and financial planning. Owning a mix of assets, ideally with a low correlation – including, stocks, bonds, real estate and gold, for example – is Investing 101.

That is… unless you’re one of the world’s most famous investors.

I recently sat down with Jim Rogers and asked for his thoughts on global markets, what he’s buying now, where bubbles might be forming and… asset allocation. (I’ll very shortly tell you how you can see this entire video – Jim Rogers unplugged.)

Jim doesn’t buy into the cult of asset allocation.

“Well, I know that people are taught to diversify. But diversification is just that’s something that brokers came up with, so they don’t get sued,” Jim told me. Then he added, “If you want to get rich… You have to concentrate and focus.”

This obviously goes against conventional thinking. But this kind of thinking is what made Jim one of the world’s most successful investors. He co-founded the Quantum Fund – one of the world’s most successful hedge funds – which saw returns of 4200 percent in ten years.

He quit full-time investing in 1980 and went on to travel the world a few times. He also wrote several books about what he saw and learned. Even if you’re not a travel or money junkie and know little about finance, these are some of the most educational and entertaining books you’ll ever read about investing.

Why (maybe) you should diversify

I’ve also written about the importance of diversification to reduce risk in your portfolio. As the saying goes, don’t put all your eggs in one basket. But you also need to make sure they’re not all on the same egg truck, either.

Diversification can limit the risks that are specific to a company or industry. For example, bad (or fraudulent) company management is a firm-specific risk. An airline employee strike, which has an industry-wide impact, is an industry risk. These are called “diversifiable risks” because they aren’t directly related to the broad financial market system.

Market risk (also called “systematic risk” because it relates to the financial system as a whole) is unavoidable for anyone investing in financial markets. Market risk is affected by things like interest rates, exchange rates and recessions. Diversification can’t touch market risk.

The graph below shows these two types of risk. Every investor is subject to systematic risk. Diversifiable risk is higher if a portfolio includes a small number of holdings. And diversifiable risk declines as the number of holdings in a portfolio increases – to a certain point. Having a portfolio with five securities definitely beats a portfolio of just one security. But diversifying beyond 30 securities doesn’t bring any additional benefits in reducing overall portfolio risk.

But Jim Rogers disagrees. “The expression on Wall Street is, don’t put all of your eggs in one basket. Ha! You should put all of your eggs in one basket,” he told me. “But be sure you’ve got the right basket and make sure you watch the basket very, very carefully.”

Now, of course this strategy of putting all your eggs in one basket… but making sure it’s the right basket, is not for everyone. It’s a high risk, high reward strategy.

And Jim acknowledges that. “If you don’t get it right, you’re going to lose everything. But if you get it right, you’re going to get very rich. And by the way, don’t think it’s easy getting it right. It’s not easy. It takes a lot of insight and work and everything else. But, if you get it right, you’ll be very rich.”

Jim shared a lot of other insights with me… I’ll tell you very soon how you can see this exclusive video.

Not believing in yourself can make getting out of bed – to say nothing of facing the world – a struggle. But having too much confidence could be even worse – for your portfolio, at least.

As humans, we tend to be overconfident. We like to see ourselves as above average, and better than our peers. We generally believe that the future will be better than the present – whether that means getting that work promotion, winning the lottery, raising our kids to be Mother Teresa or Albert Einstein, or earning a massive return on that sleeper stock. In general, we rate our chances of success tomorrow more highly than history suggests we should.

Optimism bias is the tendency to overestimate the likelihood of good things happening to us in the future. Being optimistic is hardwired into our thought processes.

For the human race as a whole, this is a good thing. People with mild depression have been shown to perceive the world in a more realistic manner than the rest of us. As such, they don’t possess the optimism bias that a more mentally healthy person does.

And in some cases, the bias swings too far in the other direction. Those with severe depression tend to have a pessimism bias, and expect the future to be much worse than it’s likely to be.

How overconfidence often creates optimism bias

One survey of a million senior high school students in the U.S. found that approximately 70 percent of the students believed they had “above-average” leadership skills, while only 2 percent considered themselves “below average.” What’s more, about 60 percent thought they were in the top 10 percent in terms of their ability to get on with others. And a massive 25 percent thought they were in the top 1 percent.

(The American humourist Garrison Keillor famously described the fictional site of some of his stories, Lake Wobegon, as a place “where all the women are strong, all the men are good-looking, and all the children are above average.”)

Optimism bias also explains why we generally discount the chances of experiencing major setbacks in our lives. Do we realise that, statistically, we’re more likely to grow a third head than we are to win the lottery? Or that there’s a very good chance that our kids will turn out normal, and that great stock will crash? According to the research, it’s pretty clear: We don’t.

A 1987 study by psychology professor Neil Weinstein involved surveying people who engaged in high-risk lifestyles. Asked to rate their chances of getting cancer or becoming an alcoholic, most respondents said their chances – which were undoubtedly high – were between “average” and “lower than average.”

Thus, we tend to think that we face less risk than others. And this is often because we base our predictions – incorrectly – on past experience, adopting the “so far so good” mantra.

How optimism bias can hurt your portfolio

Optimism bias leads to high expectations of the future – including of future investment performance. If we’re too positive about how much a stock will go up, we’re going to be disappointed. And again, being overconfident – and to a lesser extent, simply hopeful – tends to be the cause of our downfall.

Venture capitalists (VCs) are widely thought to be particularly skilled at identifying and funding new ventures, such as technology company start-ups. But a 2001 study found that 96 percent of participating VCs exhibited “significant” overconfidence – which affected their decisions.

This bias is reflected in investors’ viewpoints on Japan in the early 1990s. Japan had posted spectacular economic growth over the previous decades and many optimistically thought this would continue. But it ended up being the beginning of a “lost decade” – which has been ongoing for now over two decades. (This is also connected to “status quo” bias, which we wrote about here.)

Optimism bias has a number of causes. We often want to uphold a certain image of ourselves. A financial advisor, for instance, will want to convey confidence and positivity to his/her clients when recommending investment decisions. But often this image inflates the advisor’s ability to generate big returns.

Although overconfidence may not always lead to the wrong decision, it can prevent us from learning more and getting the complete picture. So you might not have all the information needed to make the best decision. Or you may rely on – and recall – past investment successes, while ignoring the failures. And you end up making the same mistakes again.

But overconfidence and hope can also be powerful tools. For one, they can motivate us to invest in the first place. Without believing that they’re going to make money, few people would invest (or for that matter, even get out of bed in the morning).

As Dan Ariely, a behavioural economics researcher, said, “A society in which no one is overly optimistic and no one takes too much risk wouldn’t advance much.” Underestimating such risk, though, is ultimately what gives investors the biggest headaches.

Dealing with optimism bias

The first step to defeating optimism bias is to be aware of its existence and its effects. Noticing that you are being overconfident, or simply hopeful, will act as a brake and help you clarify the basis of your decisions. And then you’ll be able to invest like a psychopath more easily.

And remember that past performance is no guide to the future. Just because a fund made 60 percent last year does not mean you should just be hopeful that it will continue to head skywards for the remainder of the year. And it doesn’t mean that you should ignore other potential opportunities.

Like the overly optimistic investors who thought Japan’s success would continue… and missed out on the future rise of China. (Which began taking shape as Japan’s economy started to slow down.)

On the other hand, if you’ve thoroughly researched an investment opportunity and you have good reason to be optimistic, fear of optimism bias shouldn’t hold you back. A positive outlook based on reality, rather than a hunch or a feeling or selective memory of past success, is much more solid.

By coldly assessing both the potential returns of an investment and your own capabilities as an investor, you’ll be able to see much of the investing world exactly as it is.

Leave it to an economist living in communist Russia to find a pattern in capitalist countries’ economies – a pattern that paints a chilling picture for the global economy over the next few years.

In the 1920s, Russian economist Nikolai Kondratiev (also spelled Kondratieff) developed a theory that prices, interest rates, foreign trade and coal and pig iron production in capitalist countries moved in long waves of 50-60 years. This meant that “great depressions” were a natural part of the capitalist system, and were followed by periods of recovery.

(Joseph Stalin didn’t like that Kondratiev’s work showed that the evil capitalist system wouldn’t collapse because of the Great Depression that started in 1929. So he sent Kondratiev to the gulag. He was executed by firing squad in 1938.)

In 1925, Kondratiev published a book called The Major Economic Cycles. In it, he overlaid his theory on the economic history of a few western nations. He found that his long waves of economic expansion and contraction matched almost perfectly with past economic performance, starting in 1789.

He then applied his theory to predict future economic cycles. So far, what he’s projected has been startlingly accurate. His idea was refined over the years and it was named the Kondratiev Wave (or K-wave) in his honour.

The cycles in the K-wave are driven by a range of factors, although what matters most is a subject of debate. Investment profits, population growth, war, the relationship between agriculture and industry, prices and technology are central to the cycles. Debt buildup, and debt repudiation, are also key.

Some economists say that the 50-60-year cycle of the K-wave is a natural part of any economy, and that long-term cycles of expansion and contraction are just part of how the world works.

The K-wave seasons
The Kondratiev Wave theory has been refined over the years and was divided into four phases: Spring, summer, autumn and winter.

Spring is characterised by an economic upswing (coming out of the winter phase), rising inflation and by technological innovation and development helping drive productivity.

The summer phase includes the boom times – and often ends in war.

Autumn is the plateau phase. There may be a speculative boom and market euphoria that leads to a stock market crash.

Then there’s winter, which is characterised by deflation, economic depression, high levels of bankruptcy, and unemployment, as debt is “cleansed” from the economy. (Kondratiev felt depressions were good for cleansing the system of excess.)

And, according to Kondratiev Wave adherents, that’s the season we’re in right now.

The winter phase began in 2000 (right around the time of the NASDAQ/tech crash). Based on past history, most winters last 20 years. That would mean we’re still in for another few years of tough economic times.

But what do the facts tell us?
The winter phase includes deflation, a troubled financial system, collapsing commodity prices (except gold, which goes up), rising interest rates, currency crises, a bear market for stocks and a cleansing, or repudiation, of debt.

The financial system is struggling. As we’ve recently written, the latest potential casualty is Deutsche Bank, Europe’s largest financial institution.

Commodity prices have fallen over the past several years as demand has not been keeping up with supply. The S&P GSCI Total Return Index, an index that reflects global commodity prices, is down 52 percent for both the past three and five years.

(One exception to this is gold. Gold prices are up over 200 percent since the end of 2000. Gold demand has surged as concerns over the global economy grow.)

There have been a number of currency crises, such as in Venezuela. And the euro is arguably in a permanent currency crisis.

What about deflation? Japan is already dealing with it and it’s rearing its head in Europe. The U.S. also flirted with deflation at the height of the 2008-2009 financial crisis. But crushing global deflation is not yet an issue.

A few elements of the K-wave Winter period, such as rising interest rates, a bear market, and debt repudiation, are missing from the picture.

Interest rates are close to zero in most major economies, and some have even gone negative. Stock markets did crash in 2008-2009, and some entered bear market territory briefly earlier this year – but there’s no global bear market in equities.

And no one is repudiating debt (yet). Instead, the global economy is borrowing more. Since 2000, the world’s total debt load has gone upover 130 percent. It’s now more than US$200 trillion.

But the lack of global deflation, low interest rates, relatively strong stock markets and massive amounts of debt are all related to one thing – the world’s central banks’ interest rate policies.

How low interest rates are affecting the K-wave cycle

Central banks have cut interest rates as much as they can to try to stimulate economic growth – and to prevent the depression usually associated with a Kondratiev Wave winter.

Low interest rates promote inflation, rather than deflation. When rates are low, people and countries take on more debt – the system certainly isn’t cleansed of it. And low interest rates are generally good for stock markets.

Central banks may be interfering with the natural “cleansing” of debt and excess that should happen to economies every 50-60 years – and that’s been happening for the past 1000 years. If that’s the case, government interference is delaying the “spring” boom that follows the K-wave winter.

One way to insulate your portfolio from any coming volatility, or a Kondratiev winter, is to buy gold.

As we’ve written about a lot, gold is a safe-haven asset. It’s one of the oldest forms of money, it holds its value when stock markets crash and is recognised worldwide as a store of value.

So if the worst of winter is indeed coming, owning gold will pay off.

We again recommend owning an ETF to invest in gold. The SPDR Gold Trust ETF can be purchased on the Singapore Exchange (code: O87) and the New York Stock Exchange (ticker: GLD). For investors using the Hong Kong Exchange, try the Value Gold ETF (code: 3081).

What all this development means is that epic sums of money will need to be spent on expanding and improving Asia’s infrastructure.

Infrastructure is a critical ingredient of economic growth. More roads and railways, improved access to clean water, and better communication networks are just a few building blocks of infrastructure critical to support development.

As I recently wrote, infrastructure is going to be one of the biggest investment themes of our lives. And there are few places in the world where infrastructure spending will be more crucial than in Asia, considering the rise of megacities in the region.

Go to the city, young people

One of the most crucial factors for this trend is the rate at which rural Asians are moving to cities. Last year, the United Nations projected that by 2018 for the first time ever, over half of the Asia-Pacific’s population will be living in urban areas. And by 2050, China and India alone will see their numbers of city dwellers explode by nearly 700 million.

That’s over a quarter of their total current combined populations. The UN projects that the number of Asia-Pacific “megacities” – cities with more than 10 million inhabitants – to increase from 17 to 22 by 2030. In 2030, India’s largest city, Mumbai, will have an economy larger than Malaysia’s was two years ago.

Rapid urbanisation in Asia is prompting the demand for high-quality infrastructure. This is likely to take the form of more and better public transport services, power generation facilities, telecommunications networks, and water and sanitation facilities, as well as more social infrastructure such as schools and hospitals.

Mind the (infrastructure) gap

Without significant investment, an “infrastructure gap” – the difference between what exists, and what’s needed – will restrict economic growth. Without sufficient roads, goods can’t be transported. Power outages destroy productivity. Unclean facilities make people sick.

Investment projections for Asia alone are mind-boggling. The Asian Development Bank (ADB) estimated in 2010 that US$8 trillion would need to be spent on infrastructure projects between 2010 and 2020 just so the region would be able to maintain the same economic growth rate. Four years later, professional services firm PricewaterhouseCoopers estimated that US$800 billion-US$1.3 trillion in infrastructure would be required every year during 2015-2020.

China and Japan take the lead

China and Japan are taking the lead in responding to Asia’s thirst for infrastructure. In January, China launched the Asian Infrastructure Investment Bank (AIIB), a multilateral development bank with the mandate to invest in infrastructure, in Asia and worldwide. The 58 founding members of the AIIB have committed a total of US$100 billion in capital (30% of which has come from China).

Last year Japan launched its own infrastructure investment initiative, the “Partnership for Quality Infrastructure”. In collaboration with the ADB, the project aims to provide US$110 billion for infrastructure development across the world over the following 5 years. In June, Prime Minister Shinzo Abe pledged to increase the effort’s financing to US$200 billion.

But government support and capital will not be enough. Private players will have to get involved to push the region forward.

The importance of PPPs

PwC estimated in 2014 that the Asia-Pacific infrastructure market would grow by 7-8 percent per year to reach US$5.36 trillion annually by 2025. That’s about the same as the combined GDP of the UK and France. And it will represent almost 60 percent of the world’s total infrastructure expenditure during the period. So the efforts from governments alone won’t come close to plugging Asia’s growing infrastructure gap. Huge investment will also be required from private sector companies.

One particular type of initiative that is increasingly popular in Asia is Public-Private Partnerships (PPPs). These are joint ventures in public infrastructure projects between a government and private investors. The private side usually finances the construction costs, and receives a return on its investment through the project’s revenues. Once this targeted return is achieved, ownership of the asset is usually transferred to the public.

Where’s the opportunity?

The easiest way to gain exposure to infrastructure growth is through ETFs. The iShares Emerging Markets Infrastructure ETF (Nasdaq: EMIF) tracks the S&P Emerging Markets Infrastructure Index, which contains a basket of infrastructure companies operating in emerging markets, with a focus on industrials, utilities and energy firms. EMIF is dominated by holdings in Chinese companies (30% of total holdings), while Korea, Malaysia, Thailand, Hong Kong and the Philippines are all in the top 10. With $46 million of assets under management, the fund is relatively small, and has posted a return of 16% in 2016 so far. It’s probably the easiest way to tap in to Asia’s enormous thirst for infrastructure.

Overall, the number of people over the age of 30 now outnumbers those who are under the age of 30. This means that a key engine of economic growth – a growing workforce – is slowly running out of gas.

But every country has its own unique demographics. And looking at country-level population growth is one indicator of which economies will be swimming against the stream to generate economic growth.

Countries where there will be more elbow room – and less

The Population Reference Bureau (PRB), a non-profit organisation that analyses world demographic trends, estimates that there will be 9.9 billion people on earth by 2050, up from 7.4 billion today, for growth of 34 percent.

The countries where there will be the most competition for a place to sit are all found in Africa. The country with the highest expected population growth is Niger, in West Africa. By 2050, PRB projects it will have almost 250 percent more people than it does today. In Niger, each woman gives birth to over 7 children – the highest fertility rate in the world. The ten countries with the highest expected population growth are all found in Africa.

The U.S., India and Malaysia are all expected to have more people by 2050 with populations 23, 29 and 32 percent bigger, respectively.

Projected Population by Country (Lowest to Highest Growth)

European countries lead the world in population decline, with eight of the ten fastest-declining populations. The worst of the bunch is the eastern European country of Romania, the population of which is expected to fall by 29 percent by 2050. Already-tiny Latvia is right behind it, similarly hurt by low fertility rates and migration.

For Asia it’s a mixed bag. China’s population is expected to fall by 2 percent, or around 30 million people by 2050 (however, its middle class is growing quickly). According to the United Nations, India will pass China as the world’s most populous country by 2022, as India’s population grows by 29 percent to 1.7 billion people in 2050.

Singapore and Hong Kong are expected by the PRB to both post solid population growth. The number of people in Singapore is anticipated to rise by about 1 million, or 18 percent, while there will be 800,000 (11 percent) more people in Hong Kong.

But Singapore and Hong Kong, along with Korea and Taiwan, are tied with Romania for lowest fertility rates in the world, at 1.2 (around one-sixth that of world champion Niger). Japan’s fertility rate of 1.5 is the main cause of its demographic challenges and the cause of an expected 20 percent decline in population by 2050. Fertility in much of Europe is similarly far below the developed world replacement fertility level of 2.1.

More wine and cheese for Europeans

As shown below, the PRB predicts Africa’s population will more than double by 2050, to 2.5 billion. But Europe’s is expected to shrink by 1 percent, to 729 million.

Demographics is a “big picture” trend. It can have a major impact on long-term economic growth – like how the economy will perform over the next few decades, not just the next few years.

So based solely on headcount, Africa looks to have a bright economic future. (The same could have been said a few generations ago – and that potential has been realised only very selectively.)

Europe, by this measure, is in trouble. It’s the only region in the world that will have fewer people by 2050 than it does today. Barring an historic (and unlikely) renaissance in productivity growth, a rapidly shrinking work force will hurt economic growth in Europe.

Population growth alone isn’t a good indicator of future economic growth. Productivity (see here), which measures how much a person, business, or country produces within a certain period, is the other main ingredient to the economic growth equation.

Lower productivity growth hurts profitability, dampens wage growth, and leads to slower improvements in (or a deterioration of) living standards. In recent years, global productivity has been slowing down – and global economic growth along with it.

Immigration – for example, from people-rich Africa – is one potential solution to the many demographic challenges facing Europe and much of Asia. In many countries, though, this has historically been politically untenable. The alternative, is almost inevitable long-term economic decline.

If the high-population growth countries of Africa were to find a way to jump start productivity (and improve the investment environment, among many other factors), the continent would be a hotbed of investment growth. However, history doesn’t offer much hope for that, either.

Demographics are only part of the picture. But they’re one of the most important ingredients that define everything else.

It makes sense that the American political calendar moves the U.S. stock market. What makes less sense is that history suggests that the U.S. election cycle may have an even bigger effect on Singapore’s stock market – as well as the rest of Asia’s.

The economic cycle and market valuations generally play a bigger role than the presidential election in U.S. stock markets performance. But presidential politics matter in the context of the clear cycle of expected policy changes, economic stimulus, hope that real change is coming – followed by the usual disappointment in the whole political process. All of these feed in to stock market performance.

How it works in the U.S.

A U.S. president serves a four-year term and can only serve a maximum of two terms. Each four-year term can be split into the post-election year (the president’s first year in office, starting in January); the midterm year (year 2 of the presidency); the pre-election year (year 3, or 2015 in this cycle) and the election year (year 4, or 2016 for this cycle).

As shown below, since 1928 the U.S.-based S&P 500 has gained an average of 12.8% during pre-election years (year 3, or the calendar year before the year of the presidential election). The most recent pre-election year was 2015 and the S&P 500 was down about 1%, breaking with tradition.

The strong performance during the pre-election year has happened over 21 election cycles – suggesting it’s more than just coincidence.

Singapore – and Asia’s – markets may be even more affected

The American presidential cycle appears to play an even bigger role in Asian markets, including Singapore’s. The STI has seen significant outperformance in the American pre-election year. Since 1975, STI returns have averaged 19% the calendar year before the year of a U.S. presidential election. The year after an election, or the post-election year, has also produced strong returns for the STI – an average of 13%.

The MSCI Asia ex Japan Index also likes pre-election and post-election years. It’s moved up 20% and 24% respectively, on average, those years (data available since 1988). But it’s flat during midterm and election years.

Why the effect on Asian markets?

Why would Singapore, and other Asian, stock markets seem to be so influenced by the American presidential election cycle? It could partly be due to the small sample size. Asian stock markets haven’t been in existence that long and haven’t seen that many presidential election cycles – Singapore’s STI has only seen 10. When there are fewer data points, it’s easier for the results to be skewed by historically unusual returns (like 2008’s big losses).

But that’s not the whole story. It could be that global investor sentiment is affected by what happens in U.S. politics. And this may affect smaller, relatively less liquid markets like Singapore’s more than other larger markets. Especially since a smaller absolute amount of money invested or withdrawn can have an outsized effect on small markets.

Whatever the case, the numbers tell us that we shouldn’t be surprised that this year’s markets have been uninspiring – it’s an election year. And election years are consistently weak for every market we looked at.

But, post-election years have historically seen above average performance for the STI and the MSCI Asia ex Japan Index. If the pattern holds, then, get ready for better stock market performance next year.

Read more below from Mark Ford, who I introduced to you to a few weeks ago. He’s a self-made multimillionaire entrepreneur, best-selling author, copywriter and real estate investor. Every Monday I’ll pass on to you some of Mark’s views and insight about wealth, living life well, and achieving success. (For more about Mark, see here.)

Below are Mark’s thoughts for this Monday.

—

How Every Decision Can Make You Richer – or Poorer

By Mark Morgan Ford

You go to lunch with a colleague. Everything is good. When the waiter puts the bill on the table, the total is $26.

Do you pick it up? Do you wait and hope he does? Or do you suggest you split it?

On the surface, this is a minor decision. But in truth, it is one of a million chances you’ve had, have, and will have to become wealthier.

A cheapskate might look at it this way:

If I pay the whole bill, I’ll be $26 poorer.

If we split the bill, I’ll be $13 poorer.

If I can get him to pay it, I’ll be $13 richer – richer than I would have been if I had to pay for my meal.

To the cheapskate, the best decision is obvious. So when the bill arrives, he gets up to “go to the bathroom,” hoping his colleague will pick up the check.

But I have a different view. Wealth building, like quantum mechanics, often operates according to laws that seem contrary to what is “obvious.”

Paying the tab, in other words, might actually make you richer. Because the $13 you spend on your lunch partner might give you a return of much more than $13.

Your generosity might signal to him that you are the kind of person he can trust. It might tell him you are someone who is willing to give first without demanding recompense. If he sees you in that light, a relationship might be seeded by this small investment on your part. A year later – it is possible to imagine – he might recommend you for a promotion when he himself gets promoted to head up your department.

It depends on your assessment of his character.

If he impresses you as a person who believes – as you do – in reciprocity, you will know that the $13 is a wise investment. If, on the other hand, he shows you that he is a person who believes in exploiting others, the wise move might be to pay only your share of the bill and not develop the relationship any further.

In either case, you are richer.

In the first case, you are richer in a potentially lucrative business relationship. In the second case, you are richer in knowledge – knowledge about him that can help you avoid trouble or seize opportunity in the future.

I am making two points: First, almost every event in your life is an opportunity for you to become richer. And second, by seeing every situation as a wealth-building opportunity, you can take the actions that will gradually make you very rich.

The people I call “instinctive wealth builders” understand this on a gut level. They see every transaction – social, personal, or business – as a wealth-related opportunity. They are always angling, even subconsciously, to increase their wealth.

Most of us aren’t born with that instinct. For us, a casual conversation is just a casual conversation. And choosing to join a club or hire or fire an employee is that and nothing more.

But the moment we put this principle into practice, we see the world very differently. Its potential is no longer limited. It is enormous, maybe even infinite. And we view every action we engage in as a chance – big or small – to increase or diminish our wealth.

Train yourself to ask the following four questions – keeping in mind that every situation, big or small, is an opportunity for you to become richer…

“In what way is this an opportunity for me to become more wealthy?” (Note: I don’t ask, “Is this a wealth-building opportunity?” – because every situation is a wealth-building opportunity.)

“What is the potential of this opportunity?”

“What are the possible problems with this opportunity?”

“What can I do to seize this opportunity?”

Look at every situation you find yourself in as an opportunity to make yourself richer. And I do mean every situation, even the most mundane. This includes:

The first thought you put in your mind when you wake up each morning.

What you listen to on your commute to work.

How you greet your boss and fellow workers.

What you talk about at the coffee machine.

The expression on your face and the firmness of your grip when you shake hands.

The conversation you initiate with the person next to you on a plane.

Whether you buy a brand-new car or a used one.

How your voice sounds when you answer the phone.

How you prepare for a meeting.

Whether you go out to lunch or eat at your desk.

Some of your opportunities will be small and some large. But by asking yourself the four questions above first, you will bring your batting average way up…

If you make it a habit to approach every situation this way, it will soon become automatic. And before you know it, you will have seized hundreds – even thousands – of wealth-building opportunities… each one making you a littler richer.

True or false: Asia’s stock markets are more affected by the American presidential election cycle than even America’s own stock markets.

Even though the economic cycle and market valuations are generally assumed to play a bigger role than presidential politics in the movements of U.S. markets, it makes sense that American presidential elections would have a big impact on American stock market performance. The predictable cycle of anticipated policy changes; economic stimulus; the fantasy that real positive change might happen; and, of course, disgust and despair at politics as usual, all figure into markets.

The graph below shows that since 1928, during the pre-election year (which we define as the calendar year that’s before the year in which a presidential election takes place), the S&P 500 has risen on average by 12.8 percent. (During the most recent pre-election year – 2015 – the S&P 500 broke with history and was down a bit less than 1 percent.) For all other years in the presidential cycle, the market has risen between 4.8 percent and 5.5 percent. That could be coincidence – but the outperformance of the pre-election year over 21 election cycles is enormous and suggests that it’s not just chance.

(A quick primer on the American presidential election cycle… The U.S. president serves a four-year term. Here we split the four-year term into the post-election year (the first year of the presidency, starting in January, which will be 2017 for this cycle), the midterm year (year 2… in this case 2018), the pre-election year (year 3 – or 2015 more recently), and the election year (year 4, or 2016).)

Asia’s markets appear to be even more influenced by America’s elections

The American presidential cycle appears to have an even greater impact on Asian markets. As shown below, during American post-election and pre-election years, the MSCI Asia ex Japan index has moved up 24 percent and 20 percent, respectively (since data became available in 1988). And it’s been flat during midterm and election years. (On average, the index has moved up 11 percent per year.)

The effect is less pronounced for the Singapore and Malaysia stock markets. But post-election (and, for Malaysia, pre-election) years are similarly the strongest. For the post-election years, the STI rose 15 percent, and the KLCI rose 16 percent, on average. For the MSCI and Singapore indexes, the election year (that is, the current year) was the weakest.

Why?

Why would Asia’s stock markets be so influenced by the American presidential election cycle? Part of the answer might rest in the small sample size. The indexes that we’re using – and Asia’s stock markets – haven’t been in existence for many four-year cycles. A small number of data points means that historically unusual returns (like stock market losses in 2008) have an outsized impact on average returns.

But that’s only part of the story. Part of the reason may be that global investor sentiment is swayed a lot by what’s happening in American politics – and this may play out in a much larger way on smaller, less liquid markets in Asia (where a smaller absolute amount of funds invested or withdrawn can have a far greater impact than in bigger markets). So positive or negative sentiment in the U.S. with respect to elections plays out in Asian markets more than it does in the U.S.

Regardless of the reason, the data tells us that we shouldn’t be surprised that this year – being an election year – has been underwhelming for markets. Election years have consistently been weak for every market. More optimistically, a post-election year has historically been great for Asian stock markets. If history holds, then, prepare for strong stock market performance next year.

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